London: Bubbles vs Spikes

When someone says "it's different this time" it's time to run for the hills. So, there is every chance that another property bubble could be inflating at the moment. But the existence of bubbles doesn't mean there are not long-term trends at work, and the London property market looks more like Google than Clickmango.

London property prices have less to do with interest rates and buy-to-let speculators than they do London's emergence as the world's leading city.

Thomas Friedman argued that the world is flat, with technology and freedom movement of capital and labour levelling out the differences between countries. Richard Florida pointed out that the world is spiky, with clusters of talent forming in the world's greatest urban centres, encouraged by economies of scale and the network effect of the interactions which drive the service sector, innovation and culture. Pick any measure of economic activity - wealth creation, innovation, job creation - major cities are responsible for a rapidly increasing share. Jones Lang LaSalle reports that 50% of all the world's commercial real estate investment now goes into just 30 locations (cities). The spikes are getting bigger and bigger and London is the spikiest of them all, the city best-placed to capitalise on the emergence of BRICS, MINTs and all the other beneficiaries of Friedman's flat world.

If you're worried about "London vs the rest of the UK" then here are some terrifying figures, reported in the Standard last week:

Two in five of the 250 largest companies in the world with a main or European headquarters have it in London, according to a study by Deloitte seen exclusively by the London Evening Standard. That is five times as many as pick Paris, the second-most popular city in Europe...


The study shows that London also come out the winner as a destination for top talent; nearly half of all high-skilled workers in the top five European business cities are employed here. Paris again comes second, with 19%, followed by Berlin (13.7%), Milan (11%) and Frankfurt (9.8%).


London's not-only pulling away from the rest of the UK, it's pulling away from the rest of Europe, becoming even more dominant in this continent than New York City is in the US. London's economy is increasingly diversified, managing to hang on to the international top spots (alongside NYC) in banking, insurance and professional services, whilst employing more people in the tech sector than anywhere else in Europe - approximately twice as many as New York. Combined with media and telecoms, London's tech scene is worth 8% of the UK's GDP, reckons Deloitte. The life sciences, design, marketing, fashion, tourism, architecture, engineering consultancy, education - pick a growth industry in the service sector and London is fast-growing or already pre-eminent, while the fact that London is still not even in the EIU's top ten most expensive cities in the world list suggests the capital is a long way from overheating.

This isn't just BC trying desperately to reassure ourselves that we didn't take out a reckless mortgage, this is to say that London's emerging housing crisis is not going away any time soon. In the next few years, London's population is due to grow to 10 million. The city will be teeming with talented, ambitious and in many cases wealthy new people. The jobs will be there for them, but they will all need somewhere to live, essential services and a means of getting about. Lewisham is swelling with people fleeing from more expensive parts of London's inner core, pushing up house prices faster than most other parts of the capital. Again, this is a long-term shift, not a short-term correction.

These are the big challenges that the upcoming Council elections will need to address. Lewisham Labour's manifesto pledges to build 500 new Council homes and "deliver" 2,000 new "affordable" homes and new primary school places, though there is no detail behind these commitments. More on all the party manifestos coming as part of our election coverage.

In the mean time, if you own a home in zone 2, consider yourself very lucky.

13 comments:

affordable? said...

Central government holds the purse strings for public sector housebuilding, not the local council.


There are signs that there may be a change of policy regarding releasing the funds for a national house building programme. All three parties have been making noises about this.


I expect they are saving their pronouncements for the run up to the next General election.

Sew247 said...

The government are pumping prices up because basically most people in this country are too stupid to realise that rising house prices are a bad thing and will equate rising prices with illusionary wealth and feel richer.

They only benefit those wishing to downsize or looking to move from somewhere like London out to the sticks where equity can be released and spent, and also the BTL brigade.

High prices means more money servicing debt to the banks = less money for expenditure on everyday things.

Brockley Nick said...

Whilst I think that Help to Buy is a flawed policy, this isn't the result of government action (or the independent central bank). As the article says, this is the direct result of the tectonic shifts in the global economy. This is happening in major cities all over the world, from Sydney to Miami. There is a flight of people and capital to the world's top cities. When the electorate is fretting about the affordability of housing, it's not in the best interest of a government to artificially inflate house prices.

Tim said...

It is a bit of both. While I agree with there is a global trend in favour of mega cities like London, you can't ignore:

- Rock bottom rates and government schemes boosting "affordability", and causing a global reach for yield = owning property.
- A legal and tax framework that makes it reasonably attractive for the mega rich to use London property to park their cash.
- Failure of successive governments to put infrastructure and policy in place to prevent concentration of business and prosperity in London, in preference to the rest of the country.
- Failure of successive governments to ensure supply (building) of housing matches demand, and that said housing is of decent quality.
- Failure of the population to pressure governments property to do address the above and a general national NIMBYism - "you can't touch our fields/parks/green belts".

I am moving to the US as soon as my job/finances/family allow, where it is possible for families with an average income to own a reasonably sized new house.

we are doomed! said...

Public sector house building was stopped in the Thatcher years by central government and the private sector was supposed to provide the housing to meet market demand. This resulted in a lot of very expensive apartments sold to foreign investors and a great shortage of affordable housing.

How was that not government policy?

Londons growth as world city will be undermined by the fact that it has a deterioriating housing stock that has not grown to meet the demand. A nice place to visit but the quality of life is worse because of this.

The UK obession with property is also in large part because for many it the only tangeble manifestation of accumulated capital. This is in large part because pension provision and financial investments are obscure, full of commissions and fees that benefit the financial sector far more than the saver. The level of financial education in the UK is very low, leaving it open the dubious antics of the City. Other countries organise this sort of thing far better (eg Singapore)

Property in the UK is a financial instrument. The British are quite as bad with property as the Americans are with health care.

That is not part of a global trend, it is just being silly.

Brockley Nick said...

Yes, not enough housing is being built. Some further reform of the planning system is needed, there should be more tax on property wealth and less on income and government should probably get back into the house-building game a bit more. Interest rates should probably have gone up 0.25% about 6 months ago, as a statement of intent that the cheap money era will be coming to an end. All these are contributory factors, which is why the article starts by saying there is probably a bit of a bubble brewing. But that doesn't mean that the long-term trend is not far more important.

If it is, as you say, a uniquely UK problem, then you'd expect to see a housing bubble across the UK and not in other parts of the world, but the opposite is true: in most of the UK, property prices are flat and way off their peaks. In other major cities around the world the same sorts of rapid property price rises are occurring. So the idea that this is all the fault of this or previous governments doesn't hold water.

"Londons growth as world city will be undermined by the fact that it has a deterioriating housing stock that has not grown to meet the demand. A nice place to visit but the quality of life is worse because of this."

Maybe. There's no evidence of that so far, and there is more to living in a city than having a lot square footage - you don't get a lot of space in Manhattan, but it's a pretty great place to live - which is why it's so expensive.

"The UK obession with property is also in large part because for many it the only tangeble manifestation of accumulated capital. This is in large part because pension provision and financial investments are obscure, full of commissions and fees that benefit the financial sector far more than the saver. The level of financial education in the UK is very low, leaving it open the dubious antics of the City."

Where's your evidence that the UK is relatively poorly educated when it comes to financial literacy? I think that is highly unlikely.

Tim may head to the US in search of space, but he won't find it in NYC, because the trend is about cities, not countries.

Brockley Nick said...

http://www.ft.com/cms/s/0/8704837c-ba7f-11e3-8b15-00144feabdc0.html#ixzz2yggLSdBu

Moreover, the ripple effect of London’s booming market is driving rapid house price growth in a ring around the capital. With annual growth rates of more than 13 per cent, the affluent, and commutable cities, of Oxford, Cambridge and Brighton take three of the top four slots for price increases outside London, according to the latest Nationwide house price index.

Outside the southeast, the picture is very different...

“A lot of this recovery is concentrated in the higher demographic areas, the higher managerial professions. Growth just doesn’t seem to be happening in the mid-market”.

“In the big regional cities prices are starting to pick up but it is from a low base,” he added.

Woo said...

Very large quality private housing develepments will be going up soon. This model is popular in Germany with investors, they involve building large blocks of flats, mid range, with all to be let so actual homes that will be lived in.

The government favours these as they will help with the shortage of affordable places to live. Lots of pension funds and institutions have billions they want to invest in long term residential investments.

doomed said...

Have they started teaching kids what a mortgage is? Or how they are are going to manage their student debt? How to save for the future. What a pension is? Ask those questions to a teenager. Or, indeed a student. There is little financial knowledge, a profound ignorance. The fact that so many people were taken in by PPI and various other financial scams is clear evidence of this. The financial sector exploits this ignorance. We don't have a population of discerning and sceptical consumers out there!

It is true that the UK property obesession is most prominent in the South East. But other parts of the UK have also suffered from bubbles and busts during other times when the government has let the credit market rip. It tends to start in London and spread out. The effects of the bubble and the inevitable market corrections are no less extreme.

More people may want to come to London if the economy is vibrant, you can get a job here. There are a couple of reasons for this. The first is that the British do not like to serve others, so there are always vacancies in the hospitality sector. When is the last time you were served by an British person in central London? It is a cultural thing that conveniently leaves vacant large numbers of jobs in the service sector.

Secondly, British employers just want someone who can do the job for as modest a wage as possible. Lots of very low paid jobs. Workers from overseas can quickly find a job in the UK. They soon find the catch. Wages are often barely at the level of a living wage and transport and housing costs are very high.

This does not make for a very good quality of life.

Yes, people want to come to London because there are opportunities. But that does not mean they will not make some money and leave as soon as they can once the economy in their home country picks up. When the rest of the European economies recover, London could find itself with a labour shortage.

Do you really think people come here because of the culture? It might be this years fashion with tourists, but that can change in a season. Often they come here because they can make some headway in a freer labour market, rather than being idle in their home country. Those other economies will inevitably recover and London will seem a mugs game, with its sub-standard housing, high rents and low pay.

We can start being proud when we address these long term structural weaknesses in our economy. It is a brief opportunity.

Most governments seem quite happy to ignore these faults and hope that the voters think that they are normal.

London is becoming dependent of a barely visible foreign workforce to do all the essential low paid work. We are forcing the low paid workers out of the central areas of London because of a housing shortage and bedroom taxes. We will end up with a ring of poor areas around the capital full of the social problems exaserpated by a hugely expensive public transport system. London will become worse than Paris.

This has is not a clever plan and it undermines the improvements opportunities we have seen in recent years.

We take one step forward, one step back.

Brockley Nick said...

"We don't have a population of discerning and sceptical consumers out there!"


I didn't ask whether the UK public is fantastically financially literate, I asked whether you had any evidence that we were uniquely bad by international standards. Clearly you don't. The rest is irrelevant.

"But other parts of the UK have also suffered from bubbles and busts during other times when the government has let the credit market rip."


As any financially literate person knows, past performance is not a guarantee of future performance. Of course there have been bubbles in the past - that doesn't mean we are currently seeing one. And we just experienced the biggest financial crash in modern history - London prices barely took a hit, though they did pause. So perhaps there is something else at work too, no?!


"More people may want to come to London if the economy is vibrant, you can get a job here."


Yes, that is what the article is about.


"The first is that the British do not like to serve others,"


Twaddle.


"When is the last time you were served by an British person in central London?"


Regularly. But yes, there are lots of migrants in London. That is also what the article is about. Did you read it?


"When the rest of the European economies recover, London could find itself with a labour shortage."



No, it won't.

"Do you really think people come here because of the culture?"


Yes, of course.


"It might be this years fashion with tourists, but that can change in a season."


No, it doesn't. London, Paris, New York, etc - these are perennial favourites.


"Often they come here because they can make some headway in a freer labour market, rather than being idle in their home country."


That's right.


"Those other economies will inevitably recover and London will seem a mugs game, with its sub-standard housing, high rents and low pay."


That's wrong. Did you read the point that London is still not that expensive a city compared to its peers?

"We can start being proud when we address these long term structural weaknesses in our economy. It is a brief opportunity."


I might agree with you if you were in any way specific about what this means.

"London is becoming dependent of a barely visible foreign workforce to do all the essential low paid work."


Correction: London IS dependent on a very visible foreign workforce at EVERY level of the economy.


"We are forcing the low paid workers out of the central areas of London because of a housing shortage and bedroom taxes."


Yes, up to a point, this is a problem. Central London is still far more mixed than most comparable cities.


"We will end up with a ring of poor areas around the capital full of the social problems exaserpated by a hugely expensive public transport system."


One of my articles, which this article links to talks about this trend. But let's not exaggerate. Outer London is hugely mixed and contains some of London's most desirable areas, from Richmond and Wimbledon to Highgate and Muswell Hill.


"London will become worse than Paris."


No, it won't. See above. Have you ever been to the Banlieue?

Londonstan said...

Ever been to Tottenham, Southhall..? London has plenty of racial ghettos.

Brockley Nick said...

Yes (Spurs fan) - not even remotely comparable.

Tim said...

This article makes a lot of sense (don't agree 100%)

www.martindurkin.com/blogs/three-cheers-urban-sprawl

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